CFA Level I · CFA Level I Exam · Analysis of Inventories
A company's inventory turnover has fallen steadily over three years while its gross margin has remained stable. Which conclusion is most likely?
The most likely conclusion is that inventory is being held longer relative to sales. A falling turnover ratio means cost of goods sold is a smaller multiple of inventory, so days of inventory on hand are rising, which may indicate slowing sales or overstocking.
- AInventory is being held longer relative to salesCorrect
- BThe company is selling inventory more quickly
- CThe company has switched from FIFO to a lower-cost method
Explanation
A lower turnover means days of inventory on hand are rising, so inventory is held longer relative to cost of sales. This may signal weaker demand or overstocking. A faster sales rate would raise turnover, and no information is given about a cost flow change.
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